Which statement describes the calculation for after-tax cash flow (Revenue - Expenses) * (1 - tax rate) + Depreciation?

Which statement describes the calculation for after-tax cash flow (Revenue - Expenses) * (1 - tax rate) + Depreciation?

• A. The formula is a standard approach to compute after-tax cash flow.
• B. The formula ignores depreciation, making it inaccurate.
• C. The formula overstates cash flows by double-counting taxes.
• D. The formula assumes depreciation has no tax effect.

Answer: (A)

The main idea is to capture cash available from operations after taxes and then convert accounting income into cash by adding back non-cash items. The term (Revenue - Expenses) * (1 - tax rate) represents after-tax operating income from the core business activities. Depreciation is a non-cash expense that reduced taxable income but did not use cash in the period, so adding it back aligns with cash flow thinking. This combination is a common, widely-used way to estimate after-tax cash flow in planning and control because it separates the tax effect on operating profit from the non-cash nature of depreciation. If you wanted to be even more precise about the depreciation tax shield, you’d include Depreciation * tax rate instead of simply adding Depreciation, giving (Revenue - Expenses) * (1 - tax rate) + Depreciation * tax_rate. But the given form is a standard, accepted approach for estimating after-tax cash flow in many contexts.

The main idea is to capture cash available from operations after taxes and then convert accounting income into cash by adding back non-cash items. The term (Revenue - Expenses) * (1 - tax rate) represents after-tax operating income from the core business activities. Depreciation is a non-cash expense that reduced taxable income but did not use cash in the period, so adding it back aligns with cash flow thinking. This combination is a common, widely-used way to estimate after-tax cash flow in planning and control because it separates the tax effect on operating profit from the non-cash nature of depreciation.

If you wanted to be even more precise about the depreciation tax shield, you’d include Depreciation * tax rate instead of simply adding Depreciation, giving (Revenue - Expenses) * (1 - tax rate) + Depreciation * tax_rate. But the given form is a standard, accepted approach for estimating after-tax cash flow in many contexts.